Freight  Rates  and  Business 
Conditions 


TWO  EDITORIALS  FROM  THE 
GALVESTON  (TEXAS)  NEWS 


Reprinted  by  the 

Association  of  Railway  Executives 

764  Transportation  Building 
Chicago 


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$ *5,  2.  3 1 5L 

4s 


FREIGHT  RATES  AND  UNEMPLOYMENT 

[An  editorial  in  the  Galveston  (Texas)  News, 

September  4,  1921] 

Washington  hears  that  the  manufacturers  who  are  coming  to 
engage  in  the  “unemployment  conference’’  are  bringing  with  them 
the  proposition  that  it  would  help  greatly  to  reduce  freight  rates 
30  or  40  per  cent.  That  it  would  help  is  not  to  be  questioned.  To 
say  that  is  merely  to  say  that  the  demand  for  commodities  increases 
somewhat  as  the  prices  for  them  decrease;  and  then,  by  adding 
to  that  truism  the  equally  trite  fact  that  as  the  demand  for 
commodities  increases  so  does  the  demand  for  labor,  one  comes  to 
the  proof  of  that  proposition  by  a process  easy  enough  to  be  fol- 
lowed by  those  who  never  so  much  as  saw  the  outside  of  a work 
on  political  economy. 

But  admitting  that  it  would  help  to  reduce  freight  rates  30 
or  40  per  cent,  whether  it  would  “greatly  help”  is  altogether  an- 
other question,  the  answer  to  which  is  not  so  obvious.  Calculations 
made  by  railroad  traffic  men,  though  at  a time  when  commodity 
prices  were  much  higher  than  they  are  now,  showed  that  the  entire 
cost  of  transportation  was  but  a very  small  percentage  of  the 
ultimate  prices  of  commodities.  Allowing  for  the  possibility  that 
those  calculations  did  not  take  all  the  facts  into  account,  one  is 
nevertheless  left  with  reason  for  doubting  if  a reduction  of  only 
30  or  40  per  cent  in  freight  rates  would  of  itself  be  causative  of 
any  considerable  increase  in  the  demand  for  commodities,  and, 
thereafter,  for  labor.  Possibly  it  could  be  said  that  the  exemplary 
influence  of  that  reduction  would  be  more  powerful  than  the  direct 
economic  effect,  in  that  a reduction  of  freight  rates  would  be  con- 
ducive to  a reduction  of  profits  and  of  wages,  the  aggregate  of  which 
would  sufficiently  lower  prices  as  to  permit  of  a greatly  increased 
consumption.  But  is  there  any  assurance  that  freight  rates  could 
drag  profits  and  wages  down  with  them,  even  part  way?  And  if 
that  were  seen  to  be  a certain  consequence,  would  the  proposal  to 
reduce  freight  rates  30  or  40  per  cent  be  as  popular  as  it  is? 

But  the  heart  of  this  question  is  whether  such  a reduction  in 
freight  rates  could  be  made  without  inflicting  serious  injury  on  the 
railroads.  To  be  sure,  there  are  those  who  contend  that  at  reduced 
rates  the  railroads  would  profit  more  from  the  increased  volume  of 
traffic  which  it  is  assumed  would  follow  than  they  do  from  the 

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present  volume  of  traffic  at  the  rates  of  the  present.  That  is  a 
proposition  that  is  not  susceptible  either  to  mathematical  demon- 
stration or  mathematical  refutation.  But  when  one  reflects  that 
railroad  operators  have  no  aversion  for  an  increase  of  profits  their 
reluctance  to  make  a heavy  and  arbitrary  reduction  of  freight  rates 
gives  a good  deal  of  persuasiveness  to  the  suspicion  that  that  argu- 
ment lacks  much  of  being  sound.  If  a reduction  of  freight  rates 
would  not  make  the  railroads  prosperous,  but  would,  on  the  con- 
trary, make  them  poorer  than  they  are,  then  assuredly  the  prescrip- 
tion of  these  manufacturers,  though  offered  as  a tonic,  would 
operate  as  a poison  to  the  industrial  body.  For  not  the  least  of  the 
causes  of  the  “unemployment”  that  they  want  to  do  away  with  is 
the  poverty  of  the  railroads.  The  railroads  themselves  are  buyers, 
immense  buyers;  buyers  of  commodities  and  of  labor.  Normally 
their  purchases  of  iron  and  steel  amount  to  something  like  a third 
of  the  total  output.  And  the  railroads  are  not  now,  and  have  not 
been  for  five  or  six  years,  in  the  market  for  commodities  and  labor 
to  anything  like  the  degree  their  needs  justify.  The  reason  is  the 
same  reason  that  has  forced  most  others  to  economize  in  their  pur- 
chases. They  haven’t  had  the  money  to  buy  all  that  they  have 
needed,  and  haven’t  got  it  now.  They  are  hard  put  to  find  the 
money  to  make  even  those  purchases  that  are  imperative  and  urgent. 
Would  it  help  us  out  of  our  industrial  troubles  to  feed  the  country 
on  the  little  fat  that  may  be  left  on  the  railroads? 


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THE  ARGUMENT  FOR  LOWER  FREIGHT  RATES 


[An  editorial  in  the  Galveston  (Texas)  News, 

September  6,  1921] 

The  railroads  are  common  carriers — but  of  passengers  and 
freight;  not  of  the  country’s  economic  troubles.  This,  you  may 
say,  is  obvious.  It  once  was,  but  has  apparently  ceased  to  be  so. 
The  railroads  themselves  have  encountered  occasion  for  reminding 
the  country  of  the  fact. 

Certain  eloquent  advocates  from  the  West  appeared  before  the 
Interstate  Commerce  Commission  the  other  day  with  a plea  that 
it  take  25  per  cent  off  the  hay  and  grain  rates.  They  said  such 
action  would  be  the  salvation  of  the  farmers.  Without  conceding 
that  it  would,  but  on  the  contrary  contending  that  it  would  profit 
the  farmers  only  from  $8  to  $56  per  capita,  assuming  that  they 
were  allowed  to  mobilize  the  reduction  in  the  freight  charges,  the 
railroads  asked  those  eloquent  appellants  what  it  would  do  to  the 
railroads  to  take  25  per  cent  off  the  hay  and  grain  rates.  Apparently 
they  were  not  prepared  to  answer  that  question.  The  likelihood  is 
it  hadn’t  occurred  to  them.  Certainly  it  doesn’t  appear  conspicu- 
ously in  the  outgivings  of  those  who  are  demanding  a steep  and 
wholesale  reduction  in  freight  rates.  They  give  us  glowing  prophe- 
cies of  the  revivifying  effect  which  a reduction  would  have  on 
this,  that  or  the  other  industry.  They  have  no  eye  to  see,  or  at  least 
no  tongue  to  tell  what  the  eye  may  see  would  be  the  effect 
on  the  railroad  industry.  They  tell  us,  to  be  sure,  that  lower  rates 
would  make  more  traffic.  But  they  neither  attempt  to  prove  it 
nor  to  show  that  with  the  lowered  rates  more  traffic  would  be 
financially  desirable  to  the  railroads. 

The  fact  seems  to  be  that  in  their  commendable  zeal  for  the 
industries  for  which  they  speak  these  appellants  for  lower  rates 
forget  that  the  railroads  have  a legal  as  well  as  a moral  right  to 
earn  a reasonable  return  on  their  investments.  They  seem  to  think 
it  enough  to  convince  the  Interstate  Commerce  Commission  that 
the  reductions  they  ask  for  would,  if  made,  be  beneficial  to  the  coun- 
try ; whereas  the  only  question  which  that  body  is  allowed  to  con- 
cern itself  with  is  whether,  if  the  reduction  asked  for  were  made, 
the  rates  would  be  fair  by  the  test  of  the  right  of  the  railroads  to 
earn  a reasonable  return  on  their  investments. 

Their  failure  to  address  themselves  to  that  one  pertinent  ques- 
tion is  the  more  remarkable — and  possibly  the  more  significant — 
because  if  they  should  prove  that  lower  rates  would  be  more 


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profitable  than  existing  rates  then  demonstration  would  not  only 
put  the  Interstate  Commerce  Commission  under  a legal  obligation 
to  make  the  reduction,  but  would  enlist  the  railroads  as  partisans 
of  their  plea.  There  can  be  no  doubt  that  the  railroads  want  rates 
put  at  exactly  that  level  which  will  make  them  most  productive  of 
net  revenue.  If,  therefore,  those  who  are  demanding  a reduction 
of  freight  rates  will  first  recognize  that  it  is  both  right  and  expe- 
dient that  the  railroads  make  a fair  profit  from  their  operations, 
and  then  set  out  to  prove  that  lower  rates  will  be  more  profitable 
than  existing  ones,  they  will  at  least  be  engaged  in  a rational  under- 
taking, whereas  they  are  engaged  in  one  that  is  hardly  that  so  long 
as  they  try  to  prove  merely  that  lower  rates  will  be  more  profitable 
for  the  industries  which  are  their  clients.  They  might  prove  that 
and  yet  fail  to  establish  either  a legal  or  a moral  reason  why  rates 
should  be  reduced ; or,  for  that  matter,  even  a ground  of  policy. 
For  the  financial  health  of  the  transportation  industry  is  a matter 
of  as  much  importance  to  the  country  as  is  the  financial  health  of 
any  other  industry,  with  the  possible  exception  of  the  farming  in- 
dustry. 

The  case  might  be  otherwise  if  the  railroads  were  reveling  in 
the  accumulated  prosperity  of  many  years.  And  it  might  be  other- 
wise if  they  were  free  agents  rather  than  wards  of  governmental 
bureaucracies.  In  the  one  contemplation  it  would  be  neither  unjust 
nor  unwise  to  require  them  to  forego  profits  for  a season  as  a 
means  of  nurturing  into  health  other  industries  whose  welfare  is 
essential  to  theirs.  And  in  the  other  contemplation  high  rates  might 
be  offered  as  evidence  of  extravagance  in  management  for  which 
they  were  responsible.  But  neither  contemplation  would  corre- 
spond to  the  realities.  There  is  probably  no  other  great  industry 
that  has  been  so  nearly  reduced  to  bankruptcy  as  has  the  railroad 
industry,  while,  as  for  extravagance  in  management,  that,  if  it  may 
justly  be  charged,  is  more  the  fault  of  government  agencies  than 
of  the  railroads. 


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